10-Q 1 pra-2013331x10q.htm 10-Q PRA-2013.3.31-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2013 or
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from              to                          
Commission file number 0-16533
ProAssurance Corporation
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
63-1261433
(State or Other Jurisdiction of
Incorporation or Organization)
(IRS Employer Identification No.)
 
 
100 Brookwood Place, Birmingham, AL
35209
(Address of Principal Executive Offices)
(Zip Code)
 
 
(205) 877-4400
 
(Registrant’s Telephone Number,
Including Area Code)
(Former Name, Former Address, and Former
Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter), during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
ý
 
  
Accelerated filer
 
¨
 
 
 
 
 
 
 
 
Non-accelerated filer
 
¨
(Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of April 25, 2013, there were 61,816,938 shares of the registrant’s common stock outstanding.




Forward-Looking Statements
Any statements in this Form 10-Q that are not historical facts are specifically identified as forward-looking statements. These statements are based upon our estimates and anticipation of future events and are subject to certain risks and uncertainties that could cause actual results to vary materially from the expected results described in the forward-looking statements. Forward-looking statements are identified by words such as, but not limited to, “anticipate”, “believe”, “estimate”, “expect”, “hope”, “hopeful”, “intend”, “likely”, “may”, “optimistic”, “possible”, “potential”, “preliminary”, “project”, “should”, “will” and other analogous expressions. There are numerous factors that could cause our actual results to differ materially from those in the forward-looking statements. Thus, sentences and phrases that we use to convey our view of future events and trends are expressly designated as forward-looking statements as are sections of this Form 10-Q that are identified as giving our outlook on future business.
Forward-looking statements relating to our business include among other things: statements concerning liquidity and capital requirements, investment valuation and performance, return on equity, financial ratios, net income, premiums, losses and loss reserves, premium rates and retention of current business, competition and market conditions, the expansion of product lines, the development or acquisition of business in new geographical areas, the availability of acceptable reinsurance, actions by regulators and rating agencies, court actions, legislative actions, payment or performance of obligations under indebtedness, payment of dividends, and other matters.
These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following factors that could affect the actual outcome of future events:
changes in general economic conditions;
our ability to maintain our dividend payments;
regulatory, legislative and judicial actions or decisions that could affect our business plans or operations;
the enactment or repeal of tort reforms;
formation or dissolution of state-sponsored medical professional liability insurance entities that could remove or add sizable groups of physicians from or to the private insurance market;
the impact of deflation or inflation;
changes in the interest rate environment;
changes in U.S. laws or government regulations regarding financial markets or market activity that may affect the U.S. economy and our business;
changes in the ability of the U.S. government to meet its obligations that may affect the U.S. economy and our business;
performance of financial markets affecting the fair value of our investments or making it difficult to determine the value of our investments;
changes in accounting policies and practices that may be adopted by our regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission, or the Public Company Accounting Oversight Board;
changes in laws or government regulations affecting medical professional liability insurance or the financial community;
the effects of changes in the healthcare delivery system, including but not limited to the Patient Protection and Affordable Care Act;
consolidation of healthcare providers and entities that are more likely to self insure and not purchase medical professional liability insurance;
uncertainties inherent in the estimate of loss and loss adjustment expense reserves and reinsurance;
changes in the availability, cost, quality, or collectability of insurance/reinsurance;
the results of litigation, including pre- or post-trial motions, trials and/or appeals we undertake;
allegation of bad faith which may arise from our handling of any particular claim, including failure to settle;
loss of independent agents;
changes in our organization, compensation and benefit plans;
our ability to retain and recruit senior management;

2


assessments from guaranty funds;
our ability to achieve continued growth through expansion into other states or through acquisitions or business combinations;
changes to the ratings assigned by rating agencies to our insurance subsidiaries, individually or as a group;
provisions in our charter documents, Delaware law and state insurance law may impede attempts to replace or remove management or may impede a takeover;
state insurance restrictions may prohibit assets held by our insurance subsidiaries, including cash and investment securities, from being used for general corporate purposes;
taxing authorities can take exception to our tax positions and cause us to incur significant amounts of legal and accounting costs and, if our defense is not successful, additional tax costs, including interest and penalties;
insurance market conditions may alter the effectiveness of our current business strategy and impact our revenues; and
expected benefits from completed and proposed acquisitions may not be achieved or may be delayed longer than expected due to business disruption; loss of customers, employees and key agents; increased operating costs or inability to achieve cost savings; and assumption of greater than expected liabilities, among other reasons.
Additional risks that could adversely affect the merger of Independent Nevada Doctors Insurance Exchange, now Independent Nevada Doctors Insurance Company (IND), and Medmarc Mutual Insurance Company, now Medmarc Casualty Insurance Company (Medmarc), into ProAssurance, include but are not limited to the following:
the outcome of any potential claims from policyholders of Medmarc and IND relating to payments or other issues arising from their respective conversions to stock insurance companies and subsequent mergers into ProAssurance;
the businesses of ProAssurance and Medmarc or ProAssurance and IND may not be integrated successfully, or such integration may take longer to accomplish than expected;
cost savings from either transaction may not be fully realized or may take longer to realize than expected;
operating costs, customer loss and business disruption following either or both transactions, including adverse effects on relationships with employees, may be greater than expected.
Our results may differ materially from those we expect and discuss in any forward-looking statements. The principal risk factors that may cause these differences are described in “Item 1A, Risk Factors” in our Form 10-K and other documents we file with the Securities and Exchange Commission, such as our current reports on Form 8-K, and our regular reports on Form 10-Q.
We caution readers not to place undue reliance on any such forward-looking statements, which are based upon conditions existing only as of the date made, and advise readers that these factors could affect our financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. Except as required by law or regulations, we do not undertake and specifically decline any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

3


 
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

4


ProAssurance Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share data)
 
March 31,
2013
 
December 31,
2012
Assets
 
 
 
Investments
 
 
 
Fixed maturities, available for sale, at fair value; amortized cost, $3,415,342 and $3,224,332, respectively
$
3,627,080

 
$
3,447,999

Equity securities, trading, at fair value; cost, $222,167 and $187,891, respectively
257,745

 
202,618

Short-term investments
149,384

 
71,737

Business owned life insurance
52,850

 
52,414

Investment in unconsolidated subsidiaries
198,189

 
121,049

Other investments
33,104

 
31,085

Total Investments
4,318,352

 
3,926,902

Cash and cash equivalents
94,830

 
118,551

Premiums receivable
122,396

 
106,312

Receivable from reinsurers on paid losses and loss adjustment expenses
2,482

 
4,517

Receivable from reinsurers on unpaid losses and loss adjustment expenses
251,053

 
191,645

Prepaid reinsurance premiums
24,804

 
13,404

Deferred policy acquisition costs
26,342

 
23,179

Real estate, net
41,490

 
41,502

Intangible assets
55,577

 
53,225

Goodwill
161,123

 
163,055

Other assets
120,297

 
234,286

Total Assets
$
5,218,746

 
$
4,876,578

Liabilities and Shareholders’ Equity
 
 
 
Liabilities
 
 
 
Policy liabilities and accruals
 
 
 
Reserve for losses and loss adjustment expenses
$
2,216,874

 
$
2,054,994

Unearned premiums
278,019

 
233,861

Reinsurance premiums payable
45,160

 
45,591

Total Policy Liabilities
2,540,053

 
2,334,446

Deferred tax liability
27,422

 
14,585

Other liabilities
165,228

 
131,967

Long-term debt, at amortized cost
125,000

 
125,000

Total Liabilities
2,857,703

 
2,605,998

Shareholders’ Equity
 
 
 
Common shares, par value $0.01 per share, 100,000,000 shares authorized, 62,060,426 and 61,867,034 shares issued, respectively
621

 
619

Additional paid-in capital
342,590

 
341,780

Accumulated other comprehensive income (loss), net of deferred tax expense (benefit) of $74,108 and $78,284, respectively
137,626

 
145,380

Retained earnings
1,880,262

 
1,782,857

 
2,361,099

 
2,270,636

Treasury shares, at cost, 243,530 shares
(56
)
 
(56
)
Total Shareholders’ Equity
2,361,043

 
2,270,580

Total Liabilities and Shareholders’ Equity
$
5,218,746

 
$
4,876,578

See accompanying notes.

5


ProAssurance Corporation and Subsidiaries
Condensed Consolidated Statements of Changes in Capital (Unaudited)
(In thousands)
 
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Treasury Stock
 
Total
Balance at December 31, 2012
$
619

 
$
341,780

 
$
145,380

 
$
1,782,857

 
$
(56
)
 
$
2,270,580

Common shares issued for compensation

 
1,939

 

 

 

 
1,939

Share-based compensation

 
2,282

 

 

 

 
2,282

Net effect of restricted and performance shares issued and stock options exercised
2

 
(3,411
)
 

 

 

 
(3,409
)
Dividends to shareholders

 

 

 
(15,445
)
 

 
(15,445
)
Other comprehensive income (loss)

 

 
(7,754
)
 

 

 
(7,754
)
Net income

 

 

 
112,850

 

 
112,850

Balance at March 31, 2013
$
621

 
$
342,590

 
$
137,626

 
$
1,880,262

 
$
(56
)
 
$
2,361,043

 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Treasury Stock
 
Total
Balance at December 31, 2011
$
346

 
$
538,625

 
$
130,037

 
$
1,699,853

 
$
(204,408
)
 
$
2,164,453

Common shares issued for compensation

 
1,654

 

 

 

 
1,654

Share-based compensation

 
2,130

 

 

 

 
2,130

Net effect of restricted and performance shares issued and stock options exercised

 
(2,440
)
 

 

 

 
(2,440
)
Dividends to shareholders

 

 

 
(7,663
)
 

 
(7,663
)
Other comprehensive income (loss)

 

 
3,012

 

 

 
3,012

Net income

 

 

 
55,645

 

 
55,645

Balance at March 31, 2012
$
346

 
$
539,969

 
$
133,049

 
$
1,747,835

 
$
(204,408
)
 
$
2,216,791

See accompanying notes.


6


ProAssurance Corporation and Subsidiaries
Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)
(In thousands, except per share data)
 
Three Months Ended March 31
 
2013
 
2012
Revenues
 
 
 
Net premiums earned
$
134,578

 
$
136,659

Net investment income
32,126

 
33,492

Equity in earnings (loss) of unconsolidated subsidiaries
(223
)
 
(2,066
)
Net realized investment gains (losses):
 
 
 
Other-than-temporary impairment (OTTI) losses

 
(1,206
)
Portion of OTTI losses recognized in (reclassified from) other comprehensive income before taxes

 

Net impairment losses recognized in earnings

 
(1,206
)
Other net realized investment gains (losses)
26,680

 
11,883

Total net realized investment gains (losses)
26,680

 
10,677

Other income
1,813

 
1,809

 
 
 
 
Total revenues
194,974

 
180,571

 
 
 


Expenses
 
 
 
Losses and loss adjustment expenses
60,887

 
78,305

Reinsurance recoveries
(3,261
)
 
(8,106
)
Net losses and loss adjustment expenses
57,626

 
70,199

Underwriting, policy acquisition and operating expenses
37,285

 
34,398

Interest expense
371

 
825

 
 
 
 
Total expenses
95,282

 
105,422

 
 
 
 
Gain on acquisition
35,492

 

 
 
 
 
Income before income taxes
135,184

 
75,149

 
 
 
 
Provision for income taxes
 
 
 
Current expense (benefit)
7,775

 
16,981

Deferred expense (benefit)
14,559

 
2,523

Total income tax expense (benefit)
22,334

 
19,504

 
 
 
 
Net income
$
112,850

 
$
55,645

 
 
 
 
Other comprehensive income, after tax, net of reclassification adjustments (see Note 10)
(7,754
)
 
3,012

 
 
 
 
Comprehensive income
$
105,096

 
$
58,657

 
 
 
 
Earnings per share:
 
 
 
Basic
$
1.83

 
$
0.91

Diluted
$
1.82

 
$
0.90

 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
Basic
61,708

 
61,177

Diluted
61,963

 
61,703

 
 
 
 
Cash dividends declared per common share
$
0.25

 
$
0.13

See accompanying notes.

7


ProAssurance Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
Three Months Ended March 31
 
2013
 
2012
Operating Activities
 
 
 
Net income
$
112,850

 
$
55,645

Adjustments to reconcile income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
12,318

 
10,382

Gain on acquisition
(35,492
)
 

Net realized investment gains
(26,680
)
 
(10,677
)
Share-based compensation
2,282

 
2,130

Deferred income taxes
14,559

 
2,523

Policy acquisition costs, net amortization (net deferral)
(3,163
)
 
(922
)
Other
(6,304
)
 
(2,588
)
Other changes in assets and liabilities, excluding effect of business combinations:
 
 
 
Premiums receivable
(13,098
)
 
(10,090
)
Reinsurance related assets and liabilities
9,099

 
2,831

Other assets
(26,119
)
 
(1,998
)
Reserve for losses and loss adjustment expenses
(37,064
)
 
(13,014
)
Unearned premiums
20,025

 
22,689

Other liabilities
(36,320
)
 
(28,811
)
Net cash provided (used) by operating activities
(13,107
)
 
28,100

Investing Activities
 
 
 
Purchases of:
 
 
 
Fixed maturities, available for sale
(100,826
)
 
(247,622
)
Equity securities, trading
(26,983
)
 
(26,678
)
Other investments
(3,616
)
 
(158
)
Funding of tax credit limited partnerships
(30,167
)
 
(12,236
)
Investment in unconsolidated subsidiaries, net
(6,614
)
 

Proceeds from sales or maturities of:
 
 
 
Fixed maturities, available for sale
173,007

 
252,234

Equity securities, trading
26,509

 
16,039

Other investments
1,364

 
486

Net sales or maturities (purchases) of short-term investments
(76,697
)
 
(13,143
)
Cash received from acquisitions
22,780

 

Unsettled security transactions, net
18,478

 
4,403

Cash received (paid) for other assets
(1,047
)
 
(1,358
)
Net cash provided (used) by investing activities
(3,812
)
 
(28,033
)
Financing Activities
 
 
 
Dividends to shareholders

 
(7,622
)
Other
(6,802
)
 
(2,415
)
Net cash provided (used) by financing activities
(6,802
)
 
(10,037
)
Increase (decrease) in cash and cash equivalents
(23,721
)
 
(9,970
)
Cash and cash equivalents at beginning of period
118,551

 
130,400

Cash and cash equivalents at end of period
$
94,830

 
$
120,430

 
 
 
 
Significant non-cash transactions
 
 
 
Deposit transferred as consideration for acquisition
$
153,700

 
$

See accompanying notes.

8

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2013


1. Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of ProAssurance Corporation and its consolidated subsidiaries (ProAssurance or PRA). The financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring adjustments, have been included. ProAssurance’s results for the three-month period ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes contained in ProAssurance’s December 31, 2012 report on Form 10-K. In connection with its preparation of the Condensed Consolidated Financial Statements, ProAssurance evaluated events that occurred subsequent to March 31, 2013 for recognition or disclosure in its financial statements and notes to financial statements.
Stock Split
The Board of Directors of ProAssurance Corporation (the Board) declared a two-for-one stock split effected December 27, 2012 in the form of a stock dividend. All share and per share information provided in this report reflects the effect of the split for all periods presented.
Accounting Changes Not Yet Adopted
Liabilities-Obligations Resulting from Joint and Several Liability Arrangements
Effective for fiscal years beginning after December 15, 2013, the Financial Accounting Standards Board (FASB) revised guidance related to obligations resulting from joint and several liability arrangements. The new guidance requires an entity to recognize, measure and disclose obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, except for obligations already addressed within existing GAAP guidance. The new guidance requires retrospective application to all prior periods presented for any such arrangements that exist at the beginning of the fiscal year of adoption. ProAssurance plans to adopt the guidance beginning January 1, 2014. Adoption of this guidance is not expected to have a material effect on ProAssurance's results of operations or financial position.
Accounting Changes Adopted
Intangibles-Goodwill and Other
Effective for fiscal years beginning after September 15, 2012, the FASB revised guidance related to impairment testing of indefinite-lived intangible assets. The new guidance permits an entity to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that an indefinite-lived intangible asset is impaired. Quantitative impairment testing is required only if the assessment of qualitative factors indicates it is more likely than not that impairment exists. ProAssurance adopted the guidance on January 1, 2013. Adoption of this guidance had no material effect on ProAssurance's results of operations or financial position.
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
Effective for interim and annual reporting periods beginning after December 15, 2012, the FASB revised guidance related to the disclosure of amounts reclassified out of accumulated other comprehensive income. The most significant provisions of the new guidance require entities to present additional disclosure, either on the face of the income statement or in the notes, regarding significant amounts reclassified, in their entirety, from accumulated other comprehensive income to net income. ProAssurance adopted the guidance on January 1, 2013. Adoption of this guidance had no material effect on ProAssurance’s results of operations or financial position as it impacts disclosures only.

9

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2013

Disclosures About Offsetting Assets and Liabilities
Effective for fiscal years beginning on or after January 1, 2013, the FASB revised guidance related to disclosures about certain assets and liabilities in an entity’s financial statements. The guidance requires disclosures related to the net and gross positions of certain financial instruments and transactions that are either eligible for offset in accordance with existing GAAP guidance or subject to an agreement that requires such offset. The guidance must be applied retrospectively for all prior periods presented. ProAssurance adopted the guidance on January 1, 2013. Adoption of this guidance had no material effect on ProAssurance’s results of operations or financial position as it impacts disclosures only.
2. Acquisitions
All entities acquired in 2013 and 2012 were accounted for in accordance with GAAP relating to business combinations.
On January 1, 2013, ProAssurance completed the acquisition of Medmarc Mutual Insurance Company, now Medmarc Casualty Insurance Company (Medmarc), through a sponsored demutualization. Medmarc is based in Chantilly, Virginia and provides products liability insurance for medical technology and life sciences companies and also provides legal professional liability insurance. ProAssurance acquired Medmarc for cash of $153.7 million, including the funding of future policy credits for eligible members of $7.5 million. ProAssurance transferred all of the cash required to complete the transaction to a third-party conversion agent for the benefit of Medmarc eligible members on December 27, 2012; the deposit was classified as a part of Other Assets at December 31, 2012. ProAssurance incurred expenses related to the purchase of approximately $1.4 million during the first three months of 2013 and approximately $1.0 million during 2012. These expenses were included as a part of operating expenses in the periods incurred.
During 2012, ProAssurance completed an acquisition of a reciprocal exchange that converted to a stock insurance company upon acquisition. The acquisition was not material to ProAssurance.
The purchase consideration for Medmarc was allocated to the assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, as shown in the table below. A $35.5 million gain on the acquisition was recognized on the date of acquisition because the purchase consideration was less than the estimated fair value of the net assets acquired. ProAssurance believes it was able to acquire Medmarc for less than the fair value of its net assets due to Medmarc's declining premium base and its small capital position relative to other insurers in the medical technology and life sciences products liability insurance market.
(In thousands)
 
 
Fixed maturities, available for sale
 
$
269,529

Equity securities, trading
 
30,976

Cash and short-term investments
 
24,008

Other investments
 
5,340

Premiums receivable
 
2,986

Receivable from reinsurers on unpaid losses and LAE
 
73,107

Intangible assets
 
3,630

Other assets
 
14,614

Reserve for losses and loss adjustment expenses
 
(201,072
)
Unearned premiums
 
(16,937
)
Deferred tax liabilities
 
(2,453
)
Other liabilities
 
(14,536
)
Fair value of net assets acquired
 
$
189,192

Gain on Acquisition
 
(35,492
)
Total purchase consideration
 
$
153,700

Intangible assets acquired principally consist of non-compete agreements, which are amortizable over their useful life of two years, and insurance licenses, which have an indefinite useful life and are not amortized.

10

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2013

ProAssurance believes that all contractual cash flows related to acquired receivables will be collected. The fair value of reserves for losses and loss adjustment expenses and related reinsurance recoverables were estimated based on the present value of the expected underlying net cash flows, including a 5% profit margin and a 5% risk premium, and were determined to be materially the same as the recorded cost basis acquired.
The following table provides Pro Forma Consolidated Results for the three months ended March 31, 2013 and 2012 as if the Medmarc transaction had occurred on January 1, 2012. ProAssurance Actual Consolidated Results have been adjusted by the following, net of related tax effects, to reflect the Pro Forma Consolidated Results below.
For the three months ended March 31, 2012, the inclusion of Medmarc operating results as ProAssurance 2012 Actual Consolidated Results did not include Medmarc. ProAssurance Actual Consolidated Results for the three months ended March 31, 2013 included Medmarc operating results (Revenue of $12.9 million and Earnings of $3.2 million).
Certain costs included in ProAssurance actual results for the three months ended March 31, 2013 have been reported in the Pro Forma Consolidated Results as if the costs had been incurred for three months ended March 31, 2012. Such costs include direct transaction costs and certain compensation costs directly related to the integration of Medmarc operations.
Prior to the acquisition date, Medmarc reported on a statutory basis and expensed policy acquisition costs associated with successful contracts as incurred. After the acquisition date, in accordance with GAAP, Medmarc policy acquisition costs associated with successful contracts were capitalized and amortized to expense as the related premium revenues were earned, but no amortization was recognized for Medmarc policies written prior to the acquisition date. The Pro Forma Consolidated Results for both 2013 and 2012 have been adjusted to reflect policy acquisition costs as if Medmarc had followed GAAP guidance for these costs in pre-acquisition periods.
Earnings for the three months ended March 31, 2012, were reduced to reflect amortization of intangible assets and debt security premiums and discounts recorded as a part of the Medmarc purchase price allocation.
The gain on the acquisition of $35.5 million that was included in ProAssurance Actual Consolidated Results for the three months ended March 31, 2013 has been reported in the Pro Forma Consolidated Results as being recognized during the three months ended March 31, 2012.
 
Three months ended March 31, 2013
 
Three months ended March 31, 2012
(In thousands)
ProAssurance
Pro Forma
Consolidated
Results
 
ProAssurance
Actual
Consolidated Results
 
ProAssurance
Pro Forma
Consolidated
Results
 
ProAssurance
Actual
Consolidated Results
Revenue
$194,974
 
$194,974
 
$190,678
 
$180,571
Earnings
$77,095
 
$112,850
 
$92,777
 
$55,645

11

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2013

3. Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three level hierarchy has been established for valuing assets and liabilities based on how transparent (observable) the inputs are that are used to determine fair value, with the inputs considered most observable categorized as Level 1 and those that are the least observable categorized as Level 3. Hierarchy levels are defined as follows:
 
Level 1:
quoted (unadjusted) market prices in active markets for identical assets and liabilities. For ProAssurance, Level 1 inputs are generally quotes for debt or equity securities actively traded in exchange or over-the-counter markets.
 
Level 2:
market data obtained from sources independent of the reporting entity (observable inputs). For ProAssurance, Level 2 inputs generally include quoted prices in markets that are not active, quoted prices for similar assets or liabilities, and results from pricing models that use observable inputs such as interest rates and yield curves that are generally available at commonly quoted intervals.
 
Level 3:
the reporting entity’s own assumptions about market participant assumptions based on the best information available in the circumstances (non-observable inputs). For ProAssurance, Level 3 inputs are used in situations where little or no Level 1 or 2 inputs are available or are inappropriate given the particular circumstances. Level 3 inputs include results from pricing models for which some or all of the inputs are not observable, discounted cash flow methodologies, single non-binding broker quotes and adjustments to externally quoted prices that are based on management judgment or estimation.
Fair values of assets and liabilities measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012, including financial instruments for which ProAssurance has elected fair value, are shown in the following tables. The tables also indicate the fair value hierarchy of the valuation techniques utilized to determine those fair values. For some assets, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. When this is the case, the asset is categorized based on the level of the most significant input to the fair value measurement. Assessments of the significance of a particular input to the fair value measurement requires judgment and consideration of factors specific to the assets being valued.

12

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2013

 
March 31, 2013
 
Fair Value Measurements Using
 
Total
(In thousands)
Level 1
 
Level 2
 
Level 3
 
Fair Value
Assets:
 
 
 
 
 
 
 
Fixed maturities, available for sale
 
 
 
 
 
 
 
U.S. Treasury obligations
$

 
$
231,004

 
$

 
$
231,004

U.S. Government-sponsored enterprise obligations

 
59,553

 

 
59,553

State and municipal bonds

 
1,285,353

 
7,175

 
1,292,528

Corporate debt, multiple observable inputs

 
1,544,040

 

 
1,544,040

Corporate debt, limited observable inputs:
 
 
 
 
 
 

Private placement senior notes

 

 
342

 
342

Other corporate debt, NRSRO ratings available

 

 
8,406

 
8,406

Other corporate debt, NRSRO ratings not available

 

 
914

 
914

Residential mortgage-backed securities

 
295,347

 

 
295,347

Agency commercial mortgage-backed securities

 
47,436

 

 
47,436

Other commercial mortgage-backed securities

 
74,369

 

 
74,369

Other asset-backed securities

 
66,065

 
7,076

 
73,141

Equity securities
 
 
 
 
 
 

Financial
80,312

 

 

 
80,312

Utilities/Energy
39,315

 

 

 
39,315

Consumer oriented
64,467

 

 

 
64,467

Technology
14,611

 

 

 
14,611

Industrial
39,558

 

 

 
39,558

All other
15,452

 
4,030

 

 
19,482

Short-term investments
141,802

 
7,582

 

 
149,384

Financial instruments carried at fair value, classified as a part of:
 
 
 
 
 
 
 
Investment in unconsolidated subsidiaries

 

 
47,540

 
47,540

Total assets
$
395,517

 
$
3,614,779

 
$
71,453

 
$
4,081,749



13

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2013

 
December 31, 2012
 
Fair Value Measurements Using
 
Total
(In thousands)
Level 1
 
Level 2
 
Level 3
 
Fair Value
Assets:
 
 
 
 
 
 
 
Fixed maturities, available for sale
 
 
 
 
 
 
 
U.S. Treasury obligations
$

 
$
205,857

 
$

 
$
205,857

U.S. Government-sponsored enterprise obligations

 
56,947

 

 
56,947

State and municipal bonds

 
1,212,804

 
7,175

 
1,219,979

Corporate debt, multiple observable inputs

 
1,455,333

 

 
1,455,333

Corporate debt, limited observable inputs:
 
 
 
 
 
 

Private placement senior notes

 

 
346

 
346

Other corporate debt, NRSRO ratings available

 

 
13,835

 
13,835

Other corporate debt, NRSRO ratings not available

 

 
1,010

 
1,010

Residential mortgage-backed securities

 
289,850

 

 
289,850

Agency commercial mortgage-backed securities

 
59,464

 

 
59,464

Other commercial mortgage-backed securities

 
74,106

 

 
74,106

Other asset-backed securities

 
67,237

 
4,035

 
71,272

Equity securities
 
 
 
 
 
 

Financial
70,900

 

 

 
70,900

Utilities/Energy
31,383

 

 

 
31,383

Consumer oriented
51,100

 

 

 
51,100

Technology
11,495

 

 

 
11,495

Industrial
18,200

 

 

 
18,200

All other
19,540

 

 

 
19,540

Short-term investments
59,761

 
11,976

 

 
71,737

Financial instruments carried at fair value, classified as a part of:
 
 
 
 
 
 

Investment in unconsolidated subsidiaries

 

 
33,739

 
33,739

Total assets
$
262,379

 
$
3,433,574

 
$
60,140

 
$
3,756,093

The fair values for securities included in the Level 2 category, with the few exceptions described below, have been developed by one of several third party, nationally recognized pricing services, including services that price only certain types of securities. Each service uses complex methodologies to determine values for securities and subject the values they develop to quality control reviews. Management has selected a primary source for each type of security in the portfolio, and reviews the values provided for reasonableness by comparing data to alternate pricing services and to available market and trade data. Values that appear inconsistent are further reviewed for appropriateness. If a value does not appear reasonable, the valuation is discussed with the service that provided the value and would be adjusted, if necessary. No such adjustments have been necessary in 2013 or 2012.
Level 2 Valuations
Below is a summary description of the valuation methodologies primarily used by the pricing services for securities in the Level 2 category, by security type:
U.S. Treasury obligations are valued based on quoted prices for identical assets, or, in markets that are not active, quotes for similar assets, taking into consideration adjustments for variations in contractual cash flows and yields to maturity.
U.S. Government-sponsored enterprise obligations are valued using pricing models that consider current and historical market data, normal trading conventions, credit ratings, and the particular structure and characteristics of the security being valued, such as yield to maturity, redemption options, and contractual cash flows. Adjustments to model inputs or model results are included in the valuation process when necessary to reflect recent events, such as regulatory, government or corporate actions or significant economic, industry or geographic events that would affect the security’s fair value.

14

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2013

State and municipal bonds are valued using a series of matrices that consider credit ratings, the structure of the security, the sector in which the security falls, yields, and contractual cash flows. Valuations are further adjusted, when necessary, to reflect recent significant economic or geographic events or ratings changes that would affect the security’s fair value.
Corporate debt with multiple observable inputs consists primarily of corporate bonds, but also includes a small number of bank loans. The methodology used to value Level 2 corporate bonds is the same as the methodology previously described for U.S. Government-sponsored enterprise obligations. Bank loans are valued by an outside vendor based upon a widely distributed, loan-specific listing of average bid and ask prices published daily by an investment industry group. The publisher of the listing derives the averages from data received from multiple market-makers for bank loans.
Residential and commercial mortgage backed securities. Agency pass-through securities are valued using a matrix, considering the issuer type, coupon rate and longest cash flows outstanding. The matrix is developed daily based on available market information. Agency and non-agency collateralized mortgage obligations are both valued using models that consider the structure of the security, current and historical information regarding prepayment speeds, ratings and ratings updates, and current and historical interest rate and interest rate spread data. Evaluations of Alt-A mortgages include a review of collateral performance data, which is generally updated monthly.
Other asset-backed securities are valued using models that consider the structure of the security, monthly payment information, current and historical information regarding prepayment speeds, ratings and ratings updates, and current and historical interest rate and interest rate spread data. Spreads and prepayment speeds consider collateral type. Evaluations of subprime home equity loans use the same evaluation methodology as previously described for Alt-A mortgages.
Short-term investments included in the Level 2 category are commercial paper and certificates of deposit maturing within one year, carried at cost which approximates the fair value of the security due to the short term to maturity.
 Level 3 Valuations
Below is a summary description of the valuation processes and methodologies used as well as quantitative information regarding securities in the Level 3 category.
Level 3 Valuation Processes
Level 3 securities are priced by the Vice President of Investments for our subsidiaries, who reports to the Chief Financial Officer.
Level 3 valuations are computed quarterly. Prices are evaluated quarterly against prior period prices and the expected change in price.
Exclusive of Investments in unconsolidated subsidiaries, which are valued at NAV, the securities noted in the disclosure are primarily NRSRO rated corporate debt instruments for which comparable market inputs are commonly available for evaluating the securities in question. Valuation of these corporate debt instruments is not overly sensitive to changes in the unobservable inputs used.

15

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2013

Level 3 Valuation Methodologies
State and municipal bonds consists of auction rate municipal bonds valued internally using either published quotes for similar securities or values produced by discounted cash flow models using yields currently available on fixed rate securities with a similar term and collateral, adjusted to consider the effect of a floating rate and a premium for illiquidity. At March 31, 2013 and December 31, 2012 all of these bonds were rated A- or better.
Corporate debt with limited observable inputs consists of private placement senior notes guaranteed by large regional banks and certain corporate bonds. Valuations are determined using dealer quotes for similar securities or discounted cash flow models using yields currently available for similar securities. Similar securities are defined as securities having like terms and payment features that are of comparable credit quality. Assessments of credit quality are based on NRSRO ratings, if available, or are subjectively determined by management if not available. At March 31, 2013, the average rating of rated securities was BBB+.
Other asset-backed securities consists of securitizations of receivables valued using dealer quotes for similar securities or discounted cash flow models using yields currently available for similar securities.
Investment in unconsolidated subsidiaries consist of limited partnership (LP) and limited liability company (LLC) interests valued using the net asset value (NAV) provided by the LP/LLC, which approximates the fair value of the interest.
Such interests include the following:
 
Unfunded
Commitments
Fair Value
(In thousands)
March 31,
2013
March 31,
2013
 
December 31,
2012
Investment in unconsolidated subsidiaries:
 
 
 
 
LP invested in senior secured debt (1)
$
32,400

$
7,600

 
$

LP invested in long equities (2)
None

5,569

 

LP primarily invested in long/short equities (3)
None

16,985

 
17,115

LPs primarily invested in non-public equities (4)
$
44,107

17,386

 
16,624

 
 
$
47,540

 
$
33,739

(1)
The LP is structured to provide income and capital appreciation primarily through investments in senior secured debt. Redemptions are not allowed. Income and capital are to be periodically distributed at the discretion of the LP over an anticipated time frame that spans from 7 to 9 years.
(2)
The LP holds long equities of public international companies. Redemptions are allowed at the end of any calendar month with a prior notice requirement of 15 days and are paid within 10 days of the end of the calendar month of the redemption request.
(3)
The LP holds both long and short U.S. and North American equities, and targets absolute returns using a strategy designed to take advantage of event-driven market opportunities. Redemptions are allowed with a notice requirement of up to 45 days and are paid within 30 days of the redemption date, unless the redemption request is for 90% or more of the requestor’s capital balance. Redemptions at the 90% and above level will be paid at 90%, with the remainder paid after the LP’s annual audit.
(4)
Comprised of interests in two unrelated LP funds, each structured to provide capital appreciation through diversified investments in private equity, which can include investments in buyout, venture capital, mezzanine debt, distressed debt and other private equity-oriented LPs. One LP allows redemption by special consent; the other does not permit redemption. Income and capital are to be periodically distributed at the discretion of the LP over an anticipated time frame that spans from 4 to 7 years.

16

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2013

Quantitative Information Regarding Level 3 Valuations
Quantitative Information about Level 3 Fair Value Measurements
 
 
Fair Value at
 
 
 
 
 
 
(In millions)
 
March 31, 2013
 
December 31, 2012
 
Valuation Technique
 
Unobservable Input
 
Range
(Weighted Average)
Assets:
 
 
 
 
 
 
 
 
 
 
State and municipal bonds
 
$7.2
 
$7.2
 
Market Comparable
Securities
 
Comparability Adjustment
 
0% - 10% (5%)
 
 
 
 
 
 
Discounted Cash Flows
 
Comparability Adjustment
 
0% - 10% (5%)
Corporate debt with limited observable inputs
 
$9.7
 
$15.2
 
Market Comparable
Securities
 
Comparability Adjustment
 
0% - 5% (2.5%)
 
 
 
 
 
 
Discounted Cash Flows
 
Comparability Adjustment
 
0% - 5% (2.5%)
Other asset-backed securities
 
$7.1
 
$4.0
 
Market Comparable
Securities
 
Comparability Adjustment
 
0% - 5% (2.5%)
 
 
 
 
 
 
Discounted Cash Flows
 
Comparability Adjustment
 
0% - 5% (2.5%)
The significant unobservable inputs used in the fair value measurement of the entity’s corporate bonds are the valuations of comparable securities with similar issuer, credit quality and maturity. Changes in the availability of comparable securities could result in changes in the fair value measurements.
Fair Value Measurements - Level 3 Assets
The following tables (the Level 3 Tables) present summary information regarding changes in the fair value of assets measured at fair value using Level 3 inputs.
 
March 31, 2013
 
Level 3 Fair Value Measurements – Assets
(In thousands)
State and Municipal Bonds
 
Corporate Debt
 
Asset-backed Securities
 
Investment in Unconsolidated Subsidiaries
 
Other Investments
 
Total
Balance December 31, 2012
$
7,175

 
$
15,191

 
$
4,035

 
$
33,739

 
$

 
$
60,140

Total gains (losses) realized and unrealized:
 
 
 
 
 
 
 
 
 
 
 
Included in earnings, as a part of:
 
 
 
 
 
 
 
 
 
 
 
Net Investment Income

 
(102
)
 
(16
)
 

 

 
(118
)
Equity in earnings of unconsolidated subsidiaries

 

 

 
1,848

 

 
1,848

Net realized investment gains (losses)

 
(69
)
 

 

 

 
(69
)
Included in other comprehensive income

 

 

 

 

 

Purchases

 
3,875

 
1,356

 
13,078

 

 
18,309

Sales

 
(616
)
 

 
(1,125
)
 

 
(1,741
)
Transfers in

 

 
1,701

 

 

 
1,701

Transfers out

 
(8,617
)
 

 

 

 
(8,617
)
Balance March 31, 2013
$
7,175

 
$
9,662

 
$
7,076

 
$
47,540

 
$

 
$
71,453

Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end
$

 
$

 
$

 
$
1,848

 
$

 
$
1,848



17

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2013

 
March 31, 2012
 
Level 3 Fair Value Measurements – Assets
(In thousands)
State and Municipal Bonds
 
Corporate Debt
 
Asset-backed Securities
 
Investment in Unconsolidated Subsidiaries
 
Other Investments
 
Total
Balance December 31, 2011
$
7,200

 
$
8,082

 
$

 
$
23,841

 
$
15,873

 
$
54,996

Total gains (losses) realized and unrealized:
 
 
 
 
 
 
 
 
 
 
 
Included in earnings, as a part of:
 
 
 
 
 
 
 
 
 
 
 
Equity in earnings of unconsolidated subsidiaries

 

 

 
589

 

 
589

Net realized investment gains (losses)

 

 

 

 
(131
)
 
(131
)
Included in other comprehensive income

 
607

 

 

 

 
607

Purchases

 

 

 

 

 

Sales
(25
)
 

 

 

 

 
(25
)
Transfers in

 

 

 

 

 

Transfers out

 

 

 

 

 

Balance March 31, 2012
$
7,175

 
$
8,689

 
$

 
$
24,430

 
$
15,742

 
$
56,036

Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end
$

 
$

 
$

 
$
589

 
$
(131
)
 
$
458


Transfers
There were no transfers between the Level 1 and Level 2 categories during the three months ended March 31, 2013 or 2012.
Transfers shown in the preceding Level 3 Tables are as of the end of the period and were to or from Level 2, unless otherwise noted.
All transfers during the three months ended March 31, 2013 related to securities held for which there was little market activity for identical or nearly identical securities during the period. The securities were valued using multiple observable inputs when those inputs were available; otherwise the securities were valued using limited observable inputs.
Fair Value Measurements - Level 3 Liabilities
The following table presents information for the three months ended March 31, 2012 regarding liabilities for which ProAssurance had elected fair value treatment.
 
March 31, 2012
 
Level 3 Fair Value Measurements - Liabilities
(In thousands)
2019 Note Payable
 
Interest rate swap agreement
 
Total
Balance December 31, 2011
$
14,180

 
$
4,659

 
$
18,839

Total (gains) losses realized and unrealized:
 
 
 
 
 
Included in earnings as a part of:
 
 
 
 
 
Net realized investment (gains) losses
868

 
(244
)
 
624

Settlements
(86
)
 

 
(86
)
Balance March 31, 2012
$
14,962

 
$
4,415

 
$
19,377

Change in unrealized (gains) losses included in earnings for the above period for Level 3 liabilities outstanding at period-end
$
868

 
$
(244
)
 
$
624


18

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2013

The 2019 Note Payable (the Note) and a related interest rate swap agreement (the Swap) were measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011, with changes in the fair value of each liability recorded in net realized gains (losses). ProAssurance assumed both liabilities as part of a previous acquisition. The fair value option was elected for the Note and the Swap because valuation at fair value better reflected the economics of the related liabilities and eliminated the inconsistency that would have otherwise resulted from carrying the Note on an amortized cost basis and the Swap at fair value. Both the Note and the Swap were repaid in July 2012. The fair values of these liabilities were determined using the present value of the expected underlying cash flows of each instrument, discounted at rates available on the valuation date for similar instruments issued by entities with a similar credit standing to ProAssurance.
Financial Instruments - Methodologies Other Than Fair Value
The following table provides the estimated fair value of our financial instruments that, in accordance with GAAP for the type of investment, are measured using a methodology other than fair value. All fair values provided fall within the Level 3 fair value category.
 
March 31, 2013
 
December 31, 2012
(In thousands)
Carrying
Value
 
Estimated
Fair
Value
 
Carrying
Value
 
Estimated
Fair
Value
Financial assets:
 
 
 
 
 
 
 
Other Investments
$
33,104

 
$
42,666

 
$
31,085

 
$
38,656

Investment in Unconsolidated Subsidiaries
150,649

 
151,593

 
87,310

 
91,528

BOLI
52,850

 
52,850

 
52,414

 
52,414

Other Assets
11,964

 
11,964

 
11,400

 
11,385

 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
Revolving credit agreement
$
125,000

 
$
125,000

 
$
125,000

 
$
125,000

Other Liabilities
12,544

 
12,534

 
12,130

 
12,085

Other Investments listed in the table above include interests in certain investment fund LPs/LLCs accounted for using the cost method, investments in Federal Home Loan Bank (FHLB) common stock carried at cost, and an annuity investment carried at amortized cost. The estimated fair value of the LP/LLC interests was based on the NAV provided by the LP/LLC managers. The estimated fair value of the FHLB common stock was based on the amount ProAssurance would receive if its membership were canceled, as the membership cannot be sold. The fair value of the annuity was the present value of the expected future cash flows discounted using a rate available in active markets for similarly structured instruments.
Investment in Unconsolidated Subsidiaries consisted of investments in tax credit partnerships and a non-controlling interest in a limited liability company. Fair values of investments in tax credit partnerships were based on the present value of the cash flows expected to be generated by the partnerships discounted at rates for investments with similar risk structures and repayment periods. The fair value of the LLC interest was estimated as the proceeds ProAssurance would receive upon liquidation of the LLC.
The fair value of the BOLI was equal to the cash surrender value associated with the policies on the valuation date.
Other Assets and Other Liabilities primarily consisted of related investment assets and liabilities associated with funded deferred compensation agreements. Other Liabilities also included certain contractual liabilities related to prior business combinations. Fair values of the funded deferred compensation assets and liabilities were based on the NAVs of the underlying securities. The fair values of the business combination liabilities were based on the present value of the expected cash flows, discounted at ProAssurance’s assumed incremental borrowing rate on the valuation date for unsecured liabilities with similar repayment structures.
The fair value of the revolving credit agreement was estimated based on the present value of expected future cash outflows under the agreement, discounted at rates available on the valuation date for similar debt issued by entities with a similar credit standing to ProAssurance.

19

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2013

4. Investments
Available-for-sale securities at March 31, 2013 and December 31, 2012 included the following:
 
March 31, 2013
(In thousands)
Amortized
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Fixed maturities
 
 
 
 
 
 
 
U.S. Treasury obligations
$
216,932

 
$
14,373

 
$
(301
)
 
$
231,004

U.S. Government-sponsored enterprise obligations
55,054

 
4,517

 
(18
)
 
59,553

State and municipal bonds
1,212,808

 
80,621

 
(901
)
 
1,292,528

Corporate debt
1,460,887

 
94,664

 
(1,849
)
 
1,553,702

Residential mortgage-backed securities
281,426

 
14,964

 
(1,043
)
*
295,347

Agency commercial mortgage-backed securities
45,700

 
1,749

 
(13
)
 
47,436

Other commercial mortgage-backed securities
70,047

 
4,343

 
(21
)
 
74,369

Other asset-backed securities
72,488

 
1,076

 
(423
)
 
73,141

 
$
3,415,342

 
$
216,307

 
$
(4,569
)
 
$
3,627,080

 
 
 
 
 
 
 
 
 
December 31, 2012
(In thousands)
Amortized
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Fixed maturities
 
 
 
 
 
 
 
U.S. Treasury obligations
$
191,642

 
$
14,266

 
$
(51
)
 
$
205,857

U.S. Government-sponsored enterprise obligations
52,110

 
4,837

 

 
56,947

State and municipal bonds
1,134,744

 
85,329

 
(94
)
 
1,219,979

Corporate debt
1,375,880

 
96,187

 
(1,543
)
 
1,470,524

Residential mortgage-backed securities
272,990

 
17,070

 
(210
)
*
289,850

Agency commercial mortgage-backed securities
57,234

 
2,255

 
(25
)
 
59,464

Other commercial mortgage-backed securities
69,062

 
5,049

 
(5
)
 
74,106

Other asset-backed securities
70,670

 
1,203

 
(601
)
 
71,272

 
$
3,224,332

 
$
226,196

 
$
(2,529
)
 
$
3,447,999

*
Includes other-than-temporary impairments recognized in accumulated other comprehensive income of $0.9 million at both March 31, 2013 and December 31, 2012.

20

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2013

The recorded cost basis and estimated fair value of available-for-sale fixed maturities at March 31, 2013, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
(In thousands)
Amortized
Cost
 
Due in one
year or less
 
Due after
one year
through
five years
 
Due after
five years
through
ten years
 
Due after
ten years
 
Total Fair
Value
Fixed maturities, available for sale
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury obligations
$
216,932

 
$
33,718

 
$
149,918

 
$
44,190

 
$
3,178

 
$
231,004

U.S. Government-sponsored enterprise obligations
55,054

 

 
51,631

 
7,684

 
238

 
59,553

State and municipal bonds
1,212,808

 
60,391

 
414,146

 
492,665

 
325,326

 
1,292,528

Corporate debt
1,460,887

 
89,847

 
704,590

 
706,162

 
53,103

 
1,553,702

Residential mortgage-backed securities
281,426

 

 

 

 

 
295,347

Agency commercial mortgage-backed securities
45,700

 

 

 

 

 
47,436

Other commercial mortgage-backed securities
70,047

 

 

 

 

 
74,369

Other asset-backed securities
72,488

 

 

 

 

 
73,141

 
$
3,415,342

 
 
 
 
 
 
 
 
 
$
3,627,080

Excluding investments in bonds and notes of the U.S. Government, U.S. Government-sponsored enterprise obligations or pre-refunded state and municipal bonds which are 100% backed by U.S. Treasury obligations, no investment in any entity or its affiliates exceeded 10% of shareholders’ equity at March 31, 2013.
Securities with a carrying value of $36.4 million at March 31, 2013 were on deposit with various state insurance departments to meet regulatory requirements. ProAssurance also held securities with a carrying value of $197.3 million at March 31, 2013 and $196.2 million at December 31, 2012 that are pledged as collateral security for advances under the Revolving Credit Agreement (see Note 9).
Business Owned Life Insurance (BOLI)
ProAssurance holds BOLI policies on management employees that are carried at the current cash surrender value of the policies (original cost $33 million). The primary purpose of the program is to offset future employee benefit expenses through earnings on the cash value of the policies. ProAssurance is the owner and principal beneficiary of these policies.
Other Investments
Other Investments at March 31, 2013 and December 31, 2012 was comprised as follows:
(In millions)
March 31,
2013
 
December 31,
2012
Investments in LPs/LLCs, at cost
$
28.2

 
$
25.1

FHLB capital stock, at cost
3.4

 
4.3

Other, principally an annuity, at amortized cost
1.5

 
1.7

 
$
33.1

 
$
31.1

FHLB capital stock is not marketable, but may be liquidated by terminating membership in the FHLB. The liquidation process can take up to five years.

21

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2013

Unconsolidated Subsidiaries
ProAssurance holds investments in unconsolidated subsidiaries, accounted for under the equity method. The investments include the following:
 
March 31, 2013
 
Carrying Value
(In millions)
Unfunded
Commitments
 
Percentage
Ownership
 
March 31,
2013
 
December 31,
2012
Investment LPs/LLCs:
 
 
 
 
 
 
 
 
Tax credit partnerships
$
55.8

 
See below
 
$
150.6

 
$
87.3

Secured debt fund
32.4

 
<
20%
 
7.6

 

Long equity fund
None

 
<
20%
 
5.6

 

Long/Short equity fund
None

 
<
20%
 
17.0

 
17.1

Non-public equity funds
44.1

 
<
20%
 
17.4

 
16.6

 
 
 
 
 
 
$
198.2

 
$
121.0

Tax credit partnership interests held by ProAssurance generate investment returns by providing tax benefits to fund investors in the form of project operating losses and tax credits. The related properties are principally low income housing projects. ProAssurance's ownership percentage relative to two of the tax credit partnership interests was almost 100%; these interests had a carrying value of $66.0 million at March 31, 2013. ProAssurance's ownership percentage relative to the remaining tax credit partnership interests was less than 20%; these interests had a carrying value of $84.6 million at March 31, 2013. All are accounted for under the equity method as ProAssurance does not have the ability to exert control over the partnership.
The Secured debt fund is structured to provide interest distributions and capital appreciation primarily through investments in senior secured debt.
The Long equity fund targets long-term total returns through holdings in public international companies.
The Long/Short equity fund targets absolute returns using a strategy designed to take advantage of event-driven market opportunities.
The Non-public equity funds hold diversified private equities and are structured to provide capital appreciation.

22

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2013

Investments Held in a Loss Position
The following tables provide summarized information with respect to investments held in an unrealized loss position at March 31, 2013 and December 31, 2012, including the length of time the investment had been held in a continuous unrealized loss position.
 
March 31, 2013
 
Total
 
Less than 12 months
 
More than 12 months
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
(In thousands)
Value
 
Loss
 
Value
 
Loss
 
Value
 
Loss
Fixed maturities, available for sale
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury obligations
$
9,578

 
$
(301
)
 
$
9,578

 
$
(301
)
 
$

 
$

U.S. Government-sponsored enterprise obligations
2,746

 
(18
)
 
2,746

 
(18
)
 

 

State and municipal bonds
110,237

 
(901
)
 
107,956

 
(878
)
 
2,281

 
(23
)
Corporate debt
142,622

 
(1,849
)
 
139,865

 
(1,645
)
 
2,757

 
(204
)
Residential mortgage-backed securities
44,170

 
(1,043
)
 
43,860

 
(1,040
)
 
310

 
(3
)
Agency commercial mortgage-backed securities
667

 
(13
)
 
445

 
(5
)
 
222

 
(8
)
Other commercial mortgage-backed securities
4,145

 
(21
)
 
4,145

 
(21
)
 

 

Other asset-backed securities
9,450

 
(423
)
 
6,257

 
(21
)
 
3,193

 
(402
)
 
$
323,615

 
$
(4,569
)
 
$
314,852

 
$
(3,929
)
 
$
8,763

 
$
(640
)
Other investments
 
 
 
 
 
 
 
 
 
 
 
Investments in LPs/LLCs carried at cost
$
4,730

 
$
(378
)
 
$
3,690

 
$
(320
)
 
$
1,040

 
$
(58
)

 
December 31, 2012
 
Total
 
Less than 12 months
 
More than 12 months
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
(In thousands)
Value
 
Loss
 
Value
 
Loss
 
Value
 
Loss
Fixed maturities, available for sale
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury obligations
$
4,073

 
$
(51
)
 
$
4,073

 
$
(51
)
 
$

 
$

State and municipal bonds
11,234

 
(94
)
 
9,232

 
(65
)
 
2,002

 
(29
)
Corporate debt
90,154

 
(1,543
)
 
81,878

 
(1,377
)
 
8,276

 
(166
)
Residential mortgage-backed securities
10,721

 
(210
)
 
10,029

 
(205
)
 
692

 
(5
)
Agency commercial mortgage-backed securities
1,643

 
(25
)
 
498

 
(2
)
 
1,145

 
(23
)
Other commercial mortgage-backed securities
2,100

 
(5
)
 
1,103

 
(1
)
 
997

 
(4
)
Other asset-backed securities
10,746

 
(601
)
 
7,707

 
(20
)
 
3,039

 
(581
)
 
$
130,671

 
$
(2,529
)
 
$
114,520

 
$
(1,721
)
 
$
16,151

 
$
(808
)
Other investments
 
 
 
 
 
 
 
 
 
 
 
Investments in LPs/LLCs carried at cost
$
9,474

 
$
(851
)
 
$
8,697

 
$
(688
)
 
$
777

 
$
(163
)
As of March 31, 2013, there were 446 debt securities (15.4% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing 242 issuers. The single greatest unrealized loss position was approximately $0.4 million; the second greatest unrealized loss position was approximately $0.3 million. The securities were evaluated for impairment as of March 31, 2013.

23

ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2013

As of December 31, 2012, there were 142 debt securities (5.7% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing 131 issuers. The single greatest unrealized loss position approximated $0.6 million; the second greatest unrealized loss position approximated $0.2 million. The securities were evaluated for impairment as of December 31, 2012.
Each quarter, ProAssurance performs a detailed analysis for the purpose of assessing whether any of the securities it holds in an unrealized loss position have suffered an other-than-temporary impairment in value. A detailed discussion of the factors considered in the assessment is included in Note 1 of the Notes to Consolidated Financial Statements included in ProAssurance's December 31, 2012 Form 10-K.
Fixed maturity securities held in an unrealized loss position at March 31, 2013, excluding asset-backed securities, have paid all scheduled contractual payments and are expected to continue doing so. Expected future cas